For Small Businesses Growing Through Acquisition
Buy-Side Tax Due Diligence
Know what you are buying. Buy-side tax due diligence answers the questions that matter before you sign: which liabilities transfer with the deal, what structure produces the best after-tax outcome, and what needs to live in escrow or indemnification.
What Buy-Side Tax DD Actually Tells You
Tax diligence is not just a search for problems. The biggest value is usually structural, deciding how to buy the business in a way that gives you the best after-tax outcome and isolates you from history you do not need to inherit.
Successor liability
If you buy the stock or membership interests of a target, you also buy its tax history. Unfiled returns, contested assessments, payroll tax exposure, and credit positions like ERC follow the entity. Asset purchases generally do not carry tax liability forward, but state successor liability rules and bulk sale notices vary. I map out which liabilities transfer and which do not before you sign.
Deal structure modeling
Asset sale, stock sale, F-reorganization, 338(h)(10) election, installment, equity rollover. Each structure produces a different after-tax outcome for both sides. Most small business deals default to whichever the seller's broker proposed, which is rarely the buyer's best option. I model the alternatives before the LOI.
Step-up in basis
If you buy assets, you generally get to depreciate them again at fair value, which is real money over time. Stock purchases lose this unless you can elect into a step-up structure (338(h)(10), F-reorg). For the right targets, the structuring decision is worth more than the price negotiation.
State nexus and sales tax exposure
Wayfair created economic nexus in nearly every state. Most small business targets have unregistered exposure in several states. Stock buyers inherit this; asset buyers may inherit it too under successor liability rules. Quantifying the exposure tells you what to put in escrow.
Reasonable compensation and worker classification
S-Corp targets that paid the owner low W-2 and high distributions, and any target with a meaningful 1099 workforce, carry payroll tax exposure that a buyer typically inherits unless carved out. I size the exposure and translate it into indemnification and escrow terms.
Tax DD Checklists by Entity Type
What to request from a target organized as each entity type. The structure of the target drives most of what you should ask for.
LLC Tax DD Checklist
Federal partnership and SMLLC issues, capital accounts, basis, 754 elections, state nexus, and entity-specific tax cleanup.
View checklistPartnership Tax DD Checklist
Hot assets (Section 751), 704(c) layers, disguised sales, 707 payments, BBA partnership audit regime, and partner-specific items.
View checklistS-Corporation Tax DD Checklist
Reasonable compensation analysis, AAA tracking, built-in gains, single class of stock compliance, and inadvertent termination history.
View checklistSmall C-Corp Tax DD Checklist
E&P, NOL Section 382 limits, accumulated earnings exposure, personal holding company status, and basis in subsidiaries.
View checklistLegal DD Checklists by Entity Type
The corporate, contracts, and IP records to request from the target. Tax and legal diligence run in parallel.
LLC Legal DD Checklist
Operating agreement, membership ledger, capital calls, IP assignments, material contracts, and change-of-control provisions.
View checklistPartnership Legal DD Checklist
Partnership agreement, partner authority, indemnification provisions, continuation rights, and capital records.
View checklistS-Corporation Legal DD Checklist
Bylaws, stock ledger, S-election history, shareholder agreements, board minutes, and 409A valuation history.
View checklistSmall C-Corp Legal DD Checklist
Articles, bylaws, stock issuances, options, equity plans, board minutes, and corporate housekeeping.
View checklistHow I Engage on Buy-Side DD
Free 30-minute strategy session
Tell me about the target. I will tell you the structural questions to answer before you sign the LOI, and what diligence will likely surface for a target of this size and type.
Pre-LOI structuring
Before exclusivity, I model asset vs. stock vs. F-reorg vs. 338(h)(10) outcomes. The structure you propose in the LOI is hard to walk back, so the modeling matters before you commit.
Tax diligence
Federal income tax, state income/franchise/CAT, sales and use tax, payroll and worker classification, ERC and other credit positions, and entity-specific issues based on the target's structure.
Purchase agreement tax provisions
Tax representations, tax indemnification, escrow allocations, transfer tax responsibility, tax return cooperation, and post-closing tax filing responsibilities. I negotiate these in parallel with your transaction counsel.
Frequently Asked Questions
When does buy-side tax DD make sense for a small acquisition?
Any acquisition large enough that an unknown tax exposure could meaningfully damage the deal. For small bolt-on acquisitions in the low six figures, a focused DD scope is often enough. For acquisitions in the seven figures and up, full tax DD is standard practice for buyers who know the playbook. The buyer who skips it is paying for the seller's hidden liabilities.
What is the difference between an asset sale and a stock sale?
In an asset sale, the buyer purchases specific assets and assumes specific liabilities. The buyer generally gets a stepped-up basis in the assets (real depreciation value) and avoids inheriting the seller's tax history. In a stock sale, the buyer purchases the entity itself, including all of its history. Stock sales are simpler but riskier for the buyer; asset sales are more complex but cleaner. Sellers usually prefer stock; buyers usually prefer asset. The structure is one of the most consequential decisions in the deal.
What is a 338(h)(10) election?
A 338(h)(10) election lets the parties treat a stock purchase as if it were an asset purchase for tax purposes. The buyer gets the legal simplicity of a stock deal plus the asset-sale step-up in basis. The seller often pays more tax than they would in a pure stock sale, so it requires negotiation and usually a price adjustment. It is only available in specific situations (S-Corp targets, qualifying subsidiaries). When available, it is often the optimal structure for both sides.
Should I do tax DD if the seller has already done sell-side DD?
Yes, but the scope changes. A credible sell-side report can be a starting point. I re-test it on the issues most likely to be missed and focus the buy-side review on items the sell-side report did not address (state nexus questions, worker classification, ERC if applicable). The total fee is usually lower when sell-side work has been done credibly.
Do you handle non-Michigan acquisitions?
Federal tax structuring and the tax review are handled regardless of where the target is located. For the legal and corporate work surrounding the acquisition (definitive agreement drafting, regulatory filings, state-specific corporate questions), I work with Michigan acquirers directly and coordinate with local counsel for non-Michigan acquirers as needed.
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